Q: I have a lot of money in my IRA. Should I use it to pay off my mortgage?
A: Probably not. With a traditional IRA, you’ll be taxed on the withdrawal at your ordinary income-tax rate, and you’ll face a 10 percent early-withdrawal fee, too, if you’re younger than 59½.
In addition, the sum you withdraw will boost your taxable income, potentially moving you into a higher tax bracket, such as from 25 to 33 percent. Another consideration is that by wiping out your mortgage debt, you’ll lose the deductibility of your mortgage-interest payments.
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Think also of your mortgage rate versus the growth rate you expect for your IRA holdings. If your mortgage rate is 5 percent, paying any of it off early essentially “earns” you 5 percent.
If your alternative is 8 percent that you aim to earn on your IRA stocks, you’re not coming out ahead. Cashing out a retirement account also means that money won’t be able to grow for you over time (tax-free, in the case of a Roth IRA).
Do the math for your particular situation, but consider keeping your IRA and trying to make extra payments on your mortgage when you can. Just a few each year can shave years off the loan and save you thousands in interest payments.
Dear Fool: I lost money in the stock market by taking the advice of brokers. I learned to use Value Line reports to pick stocks, and as a result, my stocks have soared in value.
The Fool responds: Value Line has been around since 1931 and has both fans and foes. At ValueLine.com, you can read about how stocks that are top-ranked per the Value Line system have soundly beaten the market over time.
Detractors will point out that trading costs and taxes are ignored in such calculations, and that the portfolio rejiggering required to hold only top-rated stocks would generate significant commission charges and short-term capital gains hits. The flagship Value Line Fund (VLIFX), launched in 1950, has underperformed the market over the past 10 and 15 years.
Still, you don’t have to blindly follow Value Line — you might just learn about companies from its reports and then make your own decisions. You seem to have done just that, with solid results.
If long-term sustainable wealth creation is your goal, look no further than Johnson & Johnson (NYSE: JNJ) as a candidate for your portfolio. It performs strongly year in and year out, regardless of the overall economy.
Johnson & Johnson features three main operating segments: medical devices and diagnostics, pharmaceutical and consumer — and controls more than 275 operating companies in all.
Its medical devices and diagnostics segment is the largest medical-technology business in the world, and a relatively rapid grower.
The consumer segment contains several world-class brands found in nearly every U.S. household — think Band-Aid, Listerine, Tylenol and the company’s namesake baby-care products. Its pharmaceutical business is less steady, but solid.
J&J generates approximately 70 percent of its revenue from products that hold the No. 1 or No. 2 global market positions.
It has delivered 29 consecutive years of adjusted earnings increases, and earlier this year increased its dividend for the 50th year in a row. (It recently yielded 3 percent.)
With a fortresslike balance sheet, J&J is one of only four nonfinancial, U.S.-based companies to hold the triple-A credit rating from Standard & Poor’s.
Add it all up, and what you’re left with is a hugely profitable, remarkably consistent company.